Asia FX appreciation is not necessarily guaranteed: BofA Merrill Lynch

The RMB may appreciate this year, but it's not going to be easy for Asian currencies.

Bank of America Merrill Lynch said:

Asia’s 2012 is off to a shaky, but positive, start. The natural and instinctive focus in this region will be on China’s macro policy and its implication for CNY appreciation and wider asset prices. Unfortunately, one lesson to be drawn from 2011 is that even with CNY appreciation, broader Asia FX appreciation is not necessarily guaranteed.

Preliminary indications suggest China is still committing to its stance of gradual CNY appreciation as demonstrated by the firm, stronger, fixing at the close of 2011 (Dec 30) at 6.3009 against the USD. This came on the heels of the US Treasury report on International and Exchange Rate Policies that absolved China of FX manipulation, while recognizing that the currency is “persistently misaligned and remains substantially undervalued”.

More broadly, the report recognized the faster pace of CNY REER appreciation in recent months, but also pointed to the IMF’s July model estimates that suggested the RMB was undervalued by either 3%, 14% or 23%, depending on the particular model used.